New Delhi: The expectation of a 25 basis point rate cut in the upcoming RBI Monetary Policy Committee (MPC) meeting may not generate much debate, but markets are keenly watching for signals on the next steps beyond the rate cut, according to a report released on Thursday.
Emkay Global Financial Services highlighted that the RBI is likely to maintain its approach of “easing by stealth,” using unconventional policy measures such as liquidity injections and regulatory adjustments. A key area of focus could be the stress building up in the non-sovereign money markets.
According to IANS, the report anticipates an additional Rs 300 billion worth of Open Market Operations (OMOs) in the near term, bringing the total OMO purchases for FY25 to over Rs 900 billion. A reduction in the Cash Reserve Ratio (CRR) is still a possibility, but the report warns that a temporary cut may not be sufficient to address the deeper stress within the banking system.
Instead, the RBI may focus on relaxing tighter Liquidity Coverage Ratio (LCR) requirements, which are set to be enforced from April 2025, and revisiting lending standards. Additionally, markets will be watching for further capital account easing, particularly through the Foreign Currency Non-Resident (FCNR) deposit route.
On the inflation front, the report noted that much of the price pressures in FY25 were driven by volatile food inflation, while subdued demand helped keep core inflation under control. Encouragingly, food price pressures are already showing signs of easing across various categories. January inflation is expected to drop below 4.5%, compared to 5.2% in December.
For the fourth quarter of FY25, headline inflation is projected to decline further to 4.4%, down from 5.6% in the previous quarter, thanks to a strong Kharif harvest. Looking ahead, average inflation in FY26 is expected to moderate to 4.5%, compared to 4.8%-4.9% in FY25.
The report described the RBI’s actions since December as the beginning of its “easing by stealth” strategy. This trend is expected to continue, with December’s normalization of the CRR to 4.0% injecting over Rs 1 trillion of liquidity into the system. Further liquidity measures in January added another Rs 1.5 trillion.
These carefully measured actions reflect the RBI’s strategy to ensure sufficient liquidity, stabilize inflation, and manage financial risks, all while supporting India’s broader economic growth.
